The building of the BRICS bank

Last week, India named veteran banker K.V. Kamath to be the first President of the New Development Bank, popular as the BRICS bank. The focus of this bank will be to invest in infrastructure. Mr. Kamath, 67, is a veteran banker, who was credited with developing ICICI Bank into India’s second-largest lender. He headed the bank for 13 years until 2009 and is now its Non-Executive Chairman. He is also Non-Executive Chairman of India’s second-biggest software services exporter Infosys.

What is BRICS?

In 2001, the then Goldman Sachs Group economist Jim O’Neill coined the term BRIC to describe the growing prominence of Brazil, Russia, India and China in the global economy. Not yet considered developed countries, the four were grouped together for being at the same stage of economic development.

BRIC country leaders started meeting as a bloc in 2009. South Africa joined them later, though there was some scepticism that as a country of less than 50 million people it is too small to join the group. So, BRIC is now BRICS.

What is BRICS bank?

It is how the New Development Bank is better known as. Last July, the BRICS countries agreed to set up a development bank, whose purpose, according to its articles, is to “mobilise resources for infrastructure and sustainable development projects” not just in BRICS countries but also in other emerging economies. It seeks to do so by supporting public and private projects through loans, guarantees and equity.

But doesn’t the world already have enough institutions to do that — the IMF/World Bank, for instance?

True. It’s clear their presence hasn’t been ignored in the creation of the New Development Bank. The articles of the bank do say that its creation is to complement “the existing efforts or multilateral and regional financial institutions.” But, in a sense, the BRICS bank was born because the countries that represent this have long realised they need an alternative system to IMF/World Bank, one in which they have greater say.

How will the New Development Bank be different?

So, BRICS account for about 40 per cent of the world’s population and a combined economy of about $16 trillion. Although they account for over one-fifth of the global economy, together they garner only 11 per cent of votes at IMF. On the other hand, developed countries such as the U.S., Japan, Germany, the U.K. and France hold 40 per cent of the voting power. In the BRICS bank, the founding members have equal voting rights.

Is there more to its founding?

Definitely! Hongying Wang, senior fellow at global think-tank Centre for International Governance Innovation, reckons dissatisfaction toward traditional multilateral financial institutions to be just one of the three reasons.

One of the other reasons is that the creation of a joint development bank is a milestone in the evolution of the BRICS. That is, it turns the informal co-operation among those countries into a concrete institution. Finally, the bank seeks to fill the enormous hole that exists in infrastructure financing in many developing countries.

The last point assumes significance because the traditional development banks have reduced funding for infrastructure in recent decades while private investors have been reluctant to take on long-term projects of this kind. The infrastructure financing deficit in developing countries is estimated to be $1 trillion annually. BRICS countries, especially China, have accumulated financial resources that enable them to fill the gap to some degree.

How will the bank be structured and run?

The bank will begin with a subscribed capital of $50 billion, divided equally between its five founders, with an initial total of $10 billion put in cash over the next seven years and $40 billion in guarantees.

The group has also agreed to a $100 billion currency exchange reserve, which member-countries can tap during balance of payment problems. China, the biggest foreign exchange reserve-holder amongst them, will contribute the major portion of the currency pool. Brazil, India and Russia will contribute $18 billion each while South Africa will chip in with $5 billion.

In a crisis, China will be eligible to ask for half its contribution, South Africa for double its contribution while the others can get back what they put in.

The bank will be based in Shanghai. After a five-year term at the helm by an Indian, the President’s post would by turn go to a Brazilian and then to a Russian.

The bank can add more members. Media reports suggest Russia has invited Greece, which has a huge economic battle on its hands, to be a member. Even if more members are added, the capital share of BRICS can’t drop below 55 per cent.

How does the bank’s creation play out for each of its member-countries?

Hongying Wang says, for China, this is an opportunity to export its infrastructure over-capacity. China can reduce its mammoth reserves and improve financial returns on its external assets while at the same time learn to play a leading role among the developing countries. For India and South Africa, this promises to be a welcome source of much-needed infrastructure financing. For Russia, the benefit at the moment is largely seen to be political, given that the country has been isolated in the international arena over the Ukraine issue. For Brazil, the new development bank could bring financing for its oil exploration projects.

What would be the challenges?

Raj M. Desai, Non-resident Senior Fellow, Global Economy and Development, Brookings, says the main challenges will be in setting up and operating a bank in which shares are equally divided among countries that do not have much in common, apart from their distrust of the current global governance system.

Hongying Wang has a similar view. The differences are many, as amplified by their political systems (example: China and Russia v. India, Brazil and South Africa), economic interests (example: commodity exporters v. importers), and enormous power discrepancies (China’s economy, trade, and foreign reserves being much larger than the rest combined).

Dr. Pallavi Roy, who teaches at the University of London, points out that one of the threats could, interestingly, be another development bank incubated by China. The Asian Infrastructure Investment Bank (AIIB), backed by China, has more capital and members than the BRICS Bank.

Can the BRICS bank take on IMF, World Bank?

Brookings’ Desai points out that the capital base of the World Bank and the ADB combined is about $400 billion, so it would take the participation of several other middle-income countries for the BRICS bank to be able to compete with those institutions.

But the contingency reserve account also proposed as part of the BRICS effort may provide an alternative source of stabilisation support. In this, it could potentially compete with the IMF, which has had very few takers from BRICS economies on this front in recent years.

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